Any ways to leverage BND / GNMA?

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optimum
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Any ways to leverage BND / GNMA?

Post by optimum » Sun Jun 28, 2020 5:41 pm

Since BND / GNMA (e.g., VFIIX) have one of the best sharpe ratios (also very stable in recent recessions, 2000/2008), but low CAGR, I thought it would be great a portfolio component with some leverage. Though I couldn't find any practical method to leverage them, any ideas?

Thanks in advance.

fabdog
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Re: Any ways to leverage BND / GNMA?

Post by fabdog » Sun Jun 28, 2020 7:25 pm

Well, certainly no way that bet could go sideways... but if that's your cup of tea, see if your broker will let you margin shares of BND/GNMA and use the margin loan to buy more

Mike

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Steve Reading
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Re: Any ways to leverage BND / GNMA?

Post by Steve Reading » Sun Jun 28, 2020 7:41 pm

optimum wrote:
Sun Jun 28, 2020 5:41 pm
Since BND / GNMA (e.g., VFIIX) have one of the best sharpe ratios (also very stable in recent recessions, 2000/2008), but low CAGR, I thought it would be great a portfolio component with some leverage. Though I couldn't find any practical method to leverage them, any ideas?

Thanks in advance.
The only way I can think of to leverage those exact funds is to use margin. And the only place that charges low enough of a margin fee to make it worth your while is Interactive Brokers.

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anon_investor
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Re: Any ways to leverage BND / GNMA?

Post by anon_investor » Sun Jun 28, 2020 8:08 pm

How is leveraging bond funds that have coupon rates around 1.5% and minimal capital appreciation going to move the needle?

rhe
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Re: Any ways to leverage BND / GNMA?

Post by rhe » Sun Jun 28, 2020 8:21 pm

I believe much of the historical advantage of bonds comes from the interest rate exposure, rather than the credit risk exposure. The cheapest way to get leveraged interest rate exposure is to use treasury futures. These are available through many brokerages - I used interactive brokers. I have closed out all my treasury futures positions, though. This is mainly because my tax status changed but also because I don't think rates will go very negative, and thus there is not much upside on the short end of the curve.

If you are really looking for leveraged credit risk then I agree with the previous posters: it is too expensive, and would be very dangerous even if it were cheap.

Valuethinker
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Re: Any ways to leverage BND / GNMA?

Post by Valuethinker » Mon Jun 29, 2020 8:56 am

optimum wrote:
Sun Jun 28, 2020 5:41 pm
Since BND / GNMA (e.g., VFIIX) have one of the best sharpe ratios (also very stable in recent recessions, 2000/2008), but low CAGR, I thought it would be great a portfolio component with some leverage. Though I couldn't find any practical method to leverage them, any ideas?

Thanks in advance.
The best leverage in investing is your home mortgage. It's usually very long term money at a fixed rate, and it can't be called except for failure to pay interest and principal as they fall do.

tommyt
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Re: Any ways to leverage BND / GNMA?

Post by tommyt » Mon Jun 29, 2020 10:22 am

Instead of leveraging bonds, an easy equivalent is to just buy longer duration bonds (which is essentially what leveraging bonds is anyway).

For example, let's say you want to match the Sharpe ratio of a 60/40 TSM/BND fund. The average duration of BND is 6 years and it makes up 40% of the portfolio so that makes its portfolio weighted duration (PWR) 2.4 years.

To keep the same Sharpe ratio as the 60/40 portfolio, all you have to do is the match weighted duration of the bonds. Here are some examples of portfolios that should all have similar risk adjusted performance:

60% TSM/40% BND (6 year duration, 2.4 year PWR)

85% TSM/15% Long term treasury fund (18 year duration, 2.4 year PWR)

90% TSM/10% Long term STRIPS (24 year duration, 2.4 year PWR)

95% TSM/5% TMF (18 year duration x 3 leverage = 54 years, 2.7 year PWR)

90% TSM/10% ZN future with 2.4x leverage (10 year duration x 2.4 leverage = 24 years, 2.4 year PWR)

aristotelian
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Re: Any ways to leverage BND / GNMA?

Post by aristotelian » Mon Jun 29, 2020 10:27 am

You would have to find leverage for cheaper than the yield but that is tough to do. I doubt anyone will loan you money at less than 1.4% when they could easily invest the cash themselves and earn the same yield.

Keep in mind, the Sharpe ratio of BND is less important than the Sharpe ratio of your entire portfolio. This does not answer your question but if you are seeking maximal risk-adjusted return, you might consider intermediate or long term Treasuries instead.
Last edited by aristotelian on Mon Jun 29, 2020 10:29 am, edited 1 time in total.

MotoTrojan
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Re: Any ways to leverage BND / GNMA?

Post by MotoTrojan » Mon Jun 29, 2020 10:27 am

tommyt wrote:
Mon Jun 29, 2020 10:22 am
Instead of leveraging bonds, an easy equivalent is to just buy longer duration bonds (which is essentially what leveraging bonds is anyway).

For example, let's say you want to match the Sharpe ratio of a 60/40 TSM/BND fund. The average duration of BND is 6 years and it makes up 40% of the portfolio so that makes its portfolio weighted duration (PWR) 2.4 years.

To keep the same Sharpe ratio as the 60/40 portfolio, all you have to do is the match weighted duration of the bonds. Here are some examples of portfolios that should all have similar risk adjusted performance:

60% TSM/40% BND (6 year duration, 2.4 year PWR)

85% TSM/15% Long term treasury fund (18 year duration, 2.4 year PWR)

90% TSM/10% Long term STRIPS (24 year duration, 2.4 year PWR)

95% TSM/5% TMF (18 year duration x 3 leverage = 54 years, 2.7 year PWR)

90% TSM/10% ZN future with 2.4x leverage (10 year duration x 2.4 leverage = 24 years, 2.4 year PWR)
This. Adding some EDV (long-term strips) to an equity portfolio is a great diversifier that historically has helped overall sharpe ratio, but you can't just leverage BND and expect to make 10%/year.

Rates have plummeted recently and been on a downward trend for 4 decades now; if/when that reverses, leveraged or long duration bond funds will get crushed.

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Steve Reading
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Re: Any ways to leverage BND / GNMA?

Post by Steve Reading » Mon Jun 29, 2020 10:35 am

tommyt wrote:
Mon Jun 29, 2020 10:22 am
Instead of leveraging bonds, an easy equivalent is to just buy longer duration bonds (which is essentially what leveraging bonds is anyway).
Isn't that only the case if the Sharpe ratio of every maturity is about the same?

tommyt
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Re: Any ways to leverage BND / GNMA?

Post by tommyt » Mon Jun 29, 2020 10:38 am

Steve Reading wrote:
Mon Jun 29, 2020 10:35 am
tommyt wrote:
Mon Jun 29, 2020 10:22 am
Instead of leveraging bonds, an easy equivalent is to just buy longer duration bonds (which is essentially what leveraging bonds is anyway).
Isn't that only the case if the Sharpe ratio of every maturity is about the same?
Yes, you are correct. I believe they will generally be more inefficient as you go down the yield curve. I should have specified that.

My point was that you can achieve similar performance without needing leverage, which is a big plus to many investors.

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Steve Reading
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Re: Any ways to leverage BND / GNMA?

Post by Steve Reading » Mon Jun 29, 2020 11:17 am

tommyt wrote:
Mon Jun 29, 2020 10:38 am
Steve Reading wrote:
Mon Jun 29, 2020 10:35 am
tommyt wrote:
Mon Jun 29, 2020 10:22 am
Instead of leveraging bonds, an easy equivalent is to just buy longer duration bonds (which is essentially what leveraging bonds is anyway).
Isn't that only the case if the Sharpe ratio of every maturity is about the same?
Yes, you are correct. I believe they will generally be more inefficient as you go down the yield curve. I should have specified that.

My point was that you can achieve similar performance without needing leverage, which is a big plus to many investors.
Makes sense, thanks.

rascott
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Re: Any ways to leverage BND / GNMA?

Post by rascott » Mon Jun 29, 2020 11:35 am

optimum wrote:
Sun Jun 28, 2020 5:41 pm
Since BND / GNMA (e.g., VFIIX) have one of the best sharpe ratios (also very stable in recent recessions, 2000/2008), but low CAGR, I thought it would be great a portfolio component with some leverage. Though I couldn't find any practical method to leverage them, any ideas?

Thanks in advance.
Leverage your equity position via leveraged etfs or eminis/emicros.... and you can get the same effect.

Or buy Treasury futures.

Or buy NTSX..

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